This article first appeared in Forum, The Edge Malaysia Weekly on March 20, 2023 - March 26, 2023

“Insurance is not bought but sold.”

“Insurance is not an aspirational product. People do not wake up in the morning thinking of buying insurance.”

“Customers do not engage with insurers the way they do with banks.”

We have heard these utterances for years and have accepted them as truth. It is almost paradoxical to suggest that digital, data and artificial intelligence (AI) can fundamentally change one of the oldest businesses, with roots dating back to the Babylonian merchants in 4000 to 3000 BCE. The insurance practices that we know today have been around since the 17th century with the emergence of Lloyd’s of London.

Malaysia has had a robust insurance sector since the 18th and 19th centuries, initially brought in by British agents, and through significant efforts post-independence with the establishment of local and foreign insurers serving a variety of insurance needs. Today, we have a vibrant insurance sector with 60 companies providing property and casualty, life and health, employee benefits and reinsurance protection to Malaysians.

Despite the existence of a spectrum of providers, the industry has been unable to address the “protection gap” that continues to exist in Malaysia. As per estimates, 90% of Malaysians are under-insured and over 85% of small and medium businesses are exposed to business interruption and property damage without adequate coverage. As the post-pandemic era emerges, and much of the conventional wisdom around our mortality and that of our loved ones has changed, there is evidence that customer perception around protection has changed. Governments, policymakers, businesses and individuals have realised the real impacts of the gap in terms of business losses, healthcare costs and the lack of life insurance coverage. There is a generational opportunity and alignment to fundamentally change the trajectory with the application of digital, data and AI capabilities, which were not available even two or three years ago.

Bank Negara Malaysia, through the Financial Services Blueprint released in January 2022, and the recently released exposure draft for issuing Digital Insurance and Takaful Operator (DITO) licences, has made it a policy priority to rapidly address the protection gap for Malaysians using digital technologies. This is in line with observations, such as that from the Life Insurance Association of Malaysia (LIAM), which is calling for the target penetration rate to be increased to 70% to 75%, an improvement from our long-standing threshold in the mid-50% range.

The objective is to evolve new business models to deliver inclusive insurance protection with a competitive and efficient ecosystem to Malaysians. The DITO players are expected to develop new digital value propositions that will adopt new business models like embedded insurance and emerging risk sharing models such as peer-to-peer and new business-to-business (B2B) and business-to-business-to-consumer (B2B2C) digital distribution models. Indeed, the Bank Negara blueprint advocates the use of data analytics, telematics and other digital tools to provide improved risk assessment, underwriting, claims processes and develop personalised products with stronger cybersecurity measures.

Before we examine the new models, let us briefly look into the issues the industry is facing that has led to the lack of progress, which we need to resolve collectively to move forward and achieve our objectives:

1. A fragmented business model reliant on traditional distribution models (agency and bancassurance).

2. Products and services that are based on actuarial assumptions with historical and demographical data as opposed to real-time and real-world behavioural data.

3. Legacy technologies and operating infrastructure that are inflexible and expensive and inhibit creativity, innovation and agility.

4. A deep-rooted culture and mindset that rewards risk management rather than avoidance.

The RM7.8 million (number of underserved Malaysians) question is, “Can we achieve the government and Bank Negara’s stated objectives of delivering an inclusive, competitive and efficient insurance ecosystem?”

The considered answer is, “It depends”. It is not assured that the policy framework and intent alone will yield the desired results. Here are some measures that can be taken:

1. Potential applicants must be willing and able to define their customer segments and their value propositions. We have observed this through the success of US-based Haven Life where a Fortune 500 constituent, MassMutual, established a digital-first challenger brand that sought to simplify and attract younger segments of the market to purchase life insurance. By leveraging MassMutual’s data to underpin its automated underwriting modules and using clever marketing tactics such as lifestyle-oriented loyalty programmes, Haven Life has positioned itself as one of the fastest growing direct-to-consumer life insurance companies in the market.

2. Adopting new business models that challenge orthodoxy to deliver meaningful protection to customers through the platforms of their choice. This is seen in PasarPolis, an insurtech player in Indonesia that offers customised B2B2C products for its partnership network, which includes Tokopedia, Gojek, IKEA Indonesia and Traveloka. Supported by 60,000 registered agents and 40 distribution partners, PasarPolis issued more than one billion policies between 2019 and 2021. This claim to success is underpinned by its full-stack integration capabilities and underwriting partnership with Tap Insurance Indonesia to offer highly differentiated products to customers and reach previously underserved segments of the market.

3. Implement new digital and data technologies to drive real-time, data-based decision-making, which encourages and rewards good behaviour. UK-based firms Insure The Box and Flood Flash use telematics to offer personalised insurance. Insure the Box tracks driving habits and Flood Flash tracks flood levels. Malaysian insurers AXA’s FlexiTruck and Etiqa’s Drive Less Save More are new initiatives that have emerged in the last few years to offer greater personalisation for customers.

The regulators have a large part to play as well. With the innovation in product and business models, a progressive and fit-for-purpose regulatory environment that encourages the efficient use of risk-based capital and simplifies compliance and reporting would be an essential enabler.

In this post-pandemic world full of uncertainty and heightened risk perception, there is a significant opportunity for industry players as well as new entrants to fundamentally disrupt an industry that has remained largely the same since modern insurance evolved in the 17th century. I am confident that with effective business strategies, disruptive technologies and a progressive regulatory environment, we will be able to achieve our goal.

Ravi Kittane is partner at Ernst & Young Consulting Sdn Bhd

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.